Delta 9: A Licensed Producer Focused on Maximizing Shareholder Value

November 29, 2017

Canada’s cannabis industry is about to get a lot larger with recreational legalization going into effect next year. While there are over 70 approved licensed producers, some analysts project that there will be a shortfall in the market as production struggles to keep up with massive anticipated demand. These dynamics could create a unique opportunity for licensed producers – especially those that are focused just as much on managing costs as accelerating revenue.

In this article we will take a look at Delta 9 Cannabis Inc. (TSX-V: NINE) and why its focus on maximizing shareholder value makes it a unique licensed producer.

Humble Origins

Delta 9 was conceived before there was a legal cannabis industry in Canada. In 2009, John Arbuthnot was attending the University of Western Ontario, working toward a degree in Business Administration. He was assigned to write a business plan and decided to write one for a marijuana business under the Marihuana Medical Access Regulations (MMAR), which was a precursor to the Marijuana for Medical Purposes Regulations (MMPR) and the Access to Cannabis for Medical Purposes Regulations (ACMPR) that’s in place today. He brought the idea to his father, Bill Arbuthnot, who had experience running a wide range of businesses, and the father-and-son team founded Delta 9 in 2012 to apply for a license under the new MMPR program.

Delta 9 secured the fourth license for cannabis production December of 2013, making it one of the earliest approved licensed producers. They achieved their sales license soon after, in early 2013. While many other companies were heavily funded and spent more than $10 million achieving a license, the Delta 9 team built their original facility on their own for just $950,000; an impressive use of capital!

The company then took a wait-and-see approach to the industry until the Liberal government was elected in 2015 with a mandate to legalize cannabis nationwide, and have since kicked their expansion plans into high gear. So far in 2017, the company has raised over $10 million in funding and decided to proceed with a reverse takeover to list on the TSX Venture exchange.

Focus on ROI

Delta 9’s cost-conscious approach to the industry continues despite the significant capital infusion and access to the public markets.

John and Bill jointly developed their own innovative growing system that converted steel shipping containers – known as sea cans – into highly efficient hydroponic grow pods. Each pod is approximately 40 feet long and eight feet wide with 320 square feet of growing space. They are equipped with 15 vented lights that enable cool air to run through the lighting units, which reduces the power consumption for cooling the pods. The self-contained nature of the pods also reduces the need for roof-mounted industrial HVAC systems.

Despite massive increases in quality and productivity, the Delta 9 grow pods cost only $40,000 to install, but produce between 30 to 32 kilos of dried cannabis per year. While typical purpose-built indoor or greenhouse facilities cost roughly $1 million per 1,000 square feet to build, Delta 9’s innovative, self-designed systems have driven their expansion costs down to just $120,000 per 1,000 square feet; an impressive Return on Investment.

In addition to the cost savings, the pods have a reduced risk of crop loss since they are completely isolated from each other. This is one reason that the company is one of the few licensed producers that has never gone through a recall or suspension due to mold, pests, or other quality control issues. If there is an issue with a crop, that issue is isolated to a single pod and might cost the company only $5,000 to $10,000.

Crop loss in the typical greenhouse or open growing space more typically can cost a company in the hundreds of thousands of dollars, and while Delta 9’s system might be slightly more labour intensive, the company is justifiably proud of its enviable reputation for quality control.

The company is also capable of efficiently growing many different types of cannabis since each pod can be set up to suit a particular strain or product type without affecting other product types in different pods.

The company’s location in Manitoba also provides it with a key advantage over competing companies. The province has the lowest rates for electrical power in the country, which means the company pays just 4.5 cents per kilowatt hour compared to upwards of 20 cents for some competitors. Along with lower leasing, land, and labor costs, the company estimates the cost of goods sold for each gram will be just over $1 by 2020. Combined with the lower capital outlay, these are huge advantages for shareholders looking for a high return on their investment dollars.

Looking Ahead

Delta 9 Cannabis Inc. (TSX-V: NINE) has plans to build 600 grow pods into an 80,000 square foot building and a neighboring 55,000 square foot building. Management estimates the total capital expenditure will be approximately $24 million with production of 17,500 kilograms per year. At 2016 prices, this translates to annual revenue of about $131.8 million. The team then plans to expand production to 1,800 pods on the same property over time as demand for cannabis picks up in 2020 and beyond.

“Our entire focus, every day, is to create value for our shareholders and value for our customers, and we do that by working hard to produce a very high quality product with a high degree of efficiency,” says John Arbuthnot. “We do that by only making the capital investments that really improve the business, and we do that by constantly working to improve our efficiency and drive production costs down. No matter what business you’re in, keeping your capital costs and your production costs under control is the only way to build a sustainable business.”